As the panel discussion at the recent LawInSport conference attests to, eSports is growing quickly: in terms of revenue, interest and also the necessity to consider the legal, tax and accounting structures established by teams and players alike.

The multijurisdictional nature of eSports, the autonomy of its players and the freedom that players, teams and tournaments have to move between jurisdictions (largely thanks to the widespread availability of high speed broadband) make eSports a complex but interesting proposition for us as tax advisers.

This article examines some of the key taxation issues in eSports today, looking specifically at:

The make-up of eSports from a tax perspective

Taxation of UK resident players

Taxation of non-UK resident players

Taxation of live eSports events

The make-up of eSports

eSports can be both an individual pursuit, or played as part of a team. In that respect, they are similar to “traditional” sports such as cycling, golf or Formula One. Unsurprisingly then, the tax treatment of eSports is also akin to those sports. The players that make up a team will be treated for tax purposes as self-employed individuals, rather than the football or rugby scenario where players on teams are employees of the club that they play for.

This, crucially, means that those teams don’t need to pay employer’s national insurance contributions (at 13.8% of total remuneration1) on payments that they make to their players. The team would also not have a PAYE filing obligation in respect of those players, albeit it is likely that they may be running monthly payroll (depending on whether such obligations exist in the teams home territory) to remunerate other team staff who are employees of the organisation.

There is an argument that suggests where football clubs such as Manchester City are signing players to play FIFA for them, they might have similar contracts to their traditional football players. However, as this author quickly found out when starting his eSports education, not everyone considers FIFA an eSport!2 As such, I shall move on…

Taxation of UK resident players

Aside from team commitments, needing to train with their League of Legends teammates in Berlin for example, eSports players can play the same game from anywhere (the requisite hardware and a decent internet connection all that is required).

For such internationally mobile individuals, the UK’s top rate of income tax of 45%3 is likely to seem more and more inconvenient to the top players as a higher percentage of their income starts to fall under the additional rate of tax due to the expected continued growth of the eSports market through either prize money, endorsements or the ability to monetize streaming activities.

We may therefore see cyclists and Formula One drivers saying hello to their new eSports gamer neighbours in Monaco in the future. Given that streamers often spend 10 to 15 hours a day broadcasting on Twitch and the temperature in their training arena can be regulated by some fairly standard air conditioning, the gulf countries might also be appealing – particularly if time differences suit for broadcasting to their followers.

Having said that, the reducing rate of UK corporation tax means that the option to operate through a UK company offers a “middle ground” where individuals can remain in the UK; UK companies are currently subject to tax at 19%4 (falling to 17% in 2020). It should however be noted that there are tax consequences of extracting that income and there are costs of operating a company. Therefore, this is likely only attractive once an individual is earning sufficient money that they are looking to “roll up” money in the company to use as a savings pot or investment company of the future. The lifespan of an eSports player is arguably shorter/more uncertain than for a traditional sports person (game and personal popularity play a big part) and so having funds for life after their career may be an attractive option.

Operation through a company could also be advantageous or offer other tax benefits when remunerating support staff, particularly where shares are gifted to a spouse, such that they can receive dividends from the company. Utilising tax efficient pension contributions for players (and spouses) should also be considered.

Taxation of Non-UK resident players

We would expect that HMRC would class eSports players as “performers” for tax purposes,5 as they do with athletes or musicians. eSports players from overseas coming to play in the UK, therefore, will be subject to tax in the UK on the income attributable to their “performance” in the UK. Where showcasing personal endorsements whilst performing, on apparel or equipment for example, those players will also be taxed on a proportion of their worldwide endorsement income.6

HMRC’s Foreign Entertainers Unit (FEU) may need to issue guidance on this area at some point to clarify the position. But, as outlined above, the international mobility of such individuals and the uniform nature of the gameplay across countries is likely to mean that this is not expected to generate significant tax revenue for HMRC. Players don’t need to acclimatise to conditions and so may just fly in and out for the day to compete if necessary, such that the revenue “earned” in the UK is relatively low.

Taxation of live eSports events

Whilst the freedom of movement gives plenty of options for the individual gamer, or team looking to arrange a training base, the most interesting tax questions arise in relation to the hosting of events. Players and teams might be able to move around in order to be tax efficient, but if you want 8,000 people to come and watch, the commercial realities take over.

A league final is simple enough when it is held at, for example Wembley Arena, with all technology, players, teams and fans in one place. The tax treatment follows any major final in the capital, be that World Darts or ATP tennis. The host would be required to VAT register (and charge VAT on the ticket sales), and if it didn’t have a UK entity might create a UK permanent establishment such that the profits on the event were subject to corporation tax. The entity paying the prize money would also need to consider whether it had an obligation to withhold tax on prize money payments under the FEU rules outlined above.

However, consider the scenario where a team (of players from a variety of countries) are playing from the UK, watched by 5,000 fans, against a Korean team also with a similar number of supporters physically watching in their own arena.

Throw into the mix that the remote technology is powered by servers in Germany for a prize fund paid by a Mexican company who also have 10,000 in a stadium watching the action on their own big screen… where is the tournament being held? That’s before we even get to the millions watching on their computers from around the world and the different in-game sponsorships dependent on what jurisdiction you are watching from.

It’s not the easiest scenario to unpick, I’ll be honest. There are a whole series of questions; which country has primary taxing rights over the income? Should Mexico withhold tax from the prize money? Should the UK team withhold tax from the German guy on their team? Where are the players “performing”? Who has the obligation to withhold tax, and can the players claim credit for any overseas tax domestically?

These are issues which in all likelihood will throw up the tax advisers favourite response “it depends” (which in this instance it really does…!) but the scenarios create a range of interesting conversations for tax advisers and tax authorities worldwide. If eSports revenues continue to rise, tax authorities will all want a slice of the pie and that’s when things get really interesting (and probably even more uncertain) with different tax authorities taking different approaches.

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Author

Rhys Linnell is a Tax Adviser in the Sports & Entertainment Group at Saffery Champness LLP. Rhys is a member of the Institute of Chartered Accountants in England and Wales and the Chartered Institute of Taxation.